European Services Strategy Unit Research Report No. 9 PFI/PPP Buyouts, Bailouts, Terminations and Major Problem Contracts in UK Dexter Whitfield List of ESSU Research Reports No. 1: A Typology of Privatisation and Marketisation (2006). No. 2: Options Appraisal Criteria Matrix (2007). No. 3: Cost Overruns, Delays and Terminations in 105 Outsourced Public Sector ICT Contracts (2007). No. 4: The £10bn Sale of Shares in PPP Companies: New source of profits for builders and banks - replaced by No. 6 (2011). No. 5: The Mutation of Privatisation: A critical assessment of new community and individual rights (2012). No. 6: PPP Wealth Machine: UK and Global trends in trading project ownership (2012). No. 7: Alternative to Private Finance of the Welfare State: A global analysis of social impact bond, pay-for-success and development impact bond projects, Australian Workplace Innovation and Social Research Centre, University of Adelaide and European Services Strategy Unit (2015). No. 8: The financial commodification of public infrastructure: The growth of offshore secondary market infrastructure funds (2016). Download from: http://www.european-services-strategy.org.uk/publications/essu-research-reports/ Acknowledgements Many thanks to Stewart Smyth, Sheffield University Management School, Karen Escott, Sheffield Hallam University, Helen Mercer, People v Barts PFI, for comments and discussion and to Dr Stuart Hodkinson's ESRC study (2011-2014) Public Housing Regeneration under the Private Finance Initiative: a Study about People, Place and Local Governance (RES-061-25-0536), http://www.researchcatalogue.esrc.ac.uk/grants/RES- 061-25-0536/read February 2017 Dexter Whitfield, Director Adjunct Associate Professor, Australian Industrial Transformation Institute, Flinders University Mobile +353 87 7055509 Tel. +353 66 7130225 Email: [email protected] Web: www.european-services-strategy.org.uk The European Services Strategy Unit is committed to social justice, by the provision of good quality public services by democratically accountable public bodies. The Unit continues the work of the Centre for Public Services, which began in 1973. Research and strategic advice for public bodies, trade unions and community organisations includes analysis of regional/city economies and public sector provision, jobs and employment strategies, impact assessment and the effects of marketisation, privatisation, public private partnerships and transformation. __________________________________________ __________________________________________ 2 Contents Key findings 5 Part 1: Context of buyouts, bailouts, terminations and major problems 7 Global context 7 Lack of transparency 7 Summary of projects and public costs 7 Geographic distribution 8 Sector analysis 8 Return to public ownership 8 Part 2: Theory of contracts and PPPs 10 Neoliberalism and the state-business partnership: the PFI/PPP model 10 Incomplete and complex contracts 10 Cause and effect 11 Fundamental flaws in the PFI/PPP model 11 Part 3: Buyouts analysis 17 The Hexham Hospital buyout example 17 Impact on public debt 18 Interest rate swaps 18 Council buyout barred 19 Treasury guidance on buyouts 19 Part 4: Government bailouts 20 Government bailout of PFI hospitals 20 PFI bailout funds in mergers 21 Planned mergers 22 Part 5: Terminated contracts 23 Cancelled and distressed World Bank PPP projects 23 UK has higher failure rate 23 Part 6: Major problem contracts 24 Many additional example of problem contracts 24 Future potential problems 24 Limited information 25 another PFI/PPP tax avoidance scheme 25 Overseas PPP failure by the Department for International Development 25 Part 7: Abandoned PFI/PPP projects 26 Part 8: Summary of public costs 28 Part 9: Recommendations 29 Appendix A Table 11: Buyouts of PFI/PPP projects 30 Appendix B Table 12: Terminated PFI/PPP projects 32 Appendix C Table 13: Major problems in PFI/PPP projects 36 Sources and references 48 References and links to evidence on specific projects are included in Tables 11 – 13. References and links to PFI/PPP and public policy issues are in the main reference section. Summary: The financial commodification of public infrastructure: 52 the growth of offshore secondary market infrastructure funds (2016) __________________________________________ __________________________________________ 3 List of Tables 1. Summary of buyouts, terminations and major problem contracts 2. Sector analysis of buyouts, terminations and major problem contracts 3. Geography of buyout, terminated and major problem contracts 4. Projects returned to public ownership/provision 5. Cost overruns and delays 6. Northumbria Healthcare NHS Foundation Trust’s estimate of the termination fee 7. Cost comparison of terminating and continuing the PFI contract 8. NHS PFI hospitals included in Government £1.5bn bailout 9. Abandoned PFI/PPP projects in the UK 10. Total public cost of buyouts, bailouts, terminations and major problem contracts 11. Buyout of PFI/PPP projects 12. Terminated PFI/PPP projects 13. Major problems in PFI/PPP projects Abbreviations AR Annual Report IMF International Monetary Fund BAA British Airports Authority Inc. Incorporated CIHL Consolidated Investment Holdings Ltd JLIF John Laing Infrastructure Fund Co. Company Ltd Limited CQC Care Quality Commission LP Limited Partnership DBFO Design, Build, Finance and Operate LLP Limited Liability Partnership DLR Docklands Light Railway MBC Metropolitan Borough Council ESA European System of Accounts MoD Ministry of Defence ESSU European Services Strategy Unit NAO National Audit Office EU European Union NATS National Air Traffic Services EIB European Investment Bank NHS National Health Service FCO Foreign and Commonwealth Office NPD Non-Profit Distributing GAAP Generally Accepted Accounting OECD Organisation for Economic Co-operation Principles & Development G20 Group of twenty major economies PAC Public Accounts Committee GCP Gravis Capital Partners PFI Private Finance Initiative GSL Global Solutions Limited PF2 Private Finance 2 HBOS Halifax Bank of Scotland PLC Public Listed Company HICL HICL Infrastructure Company Limited PPP Public Private Partnership HMRC HM Revenue and Customs RNS Regulatory News Service HQ Headquarters SPV Special Purpose Vehicle (usually a HRA Housing Revenue Account Company) HSBC Hongkong and Shanghai Banking SPC Special Purpose Company Corporation TfL Transport for London ICT Information and Communications UK United Kingdom Technology US United States IFRS International Financial Reporting VAT Value Added Tax Standards __________________________________________ __________________________________________ 4 Key findings Global context The UK has been a global leader in the implementation of over 800 PFI/PPP projects since the early 1990’s. Hence the overall performance of the UK’s PFI/PPP projects with regard to buyouts, bailouts, terminations and major problem contracts is of global interest. The scale of PFI/PPP buyouts, bailouts, terminations and major problem contracts • 74 projects - 11 Buyouts, 20 terminations and 43 with major problems. • 57 in England, 12 in Scotland, 4 in Wales and 1 in Northern Ireland. • 28% of PFI/PPP contracts by capital value have been to subject to buyout, termination or major problems. • Health (14), transport (10), housing (9), ICT (9) and education (8) projects accounted for 70% of the buyouts, terminations and major problem contracts. The public cost of buyouts, terminations and major problem contracts to date is £3,755m; however, public costs have yet to be determined for many major problem contracts, so this total is expected to rise significantly. Bailouts The Department of Health was forced to provide a £1.5bn bailout fund to NHS Trusts with significant PFI projects because “…the trusts’ plans are not viable without some level of central support” (NAO, 2012). More trusts have since accessed this fund, particularly those engaged in mergers. On this basis, the £1.5bn allocation will be spent by 2027, well before many NHS PFI projects conclude. NHS trusts are likely to require a further £1.5bn in additional support for PFI projects over the next 20 years. Abandoned projects Sixteen PFI/PPP projects were cancelled at a cost of £114.3m. The cost would be significantly higher if information was publicly available for other cancelled projects. High public cost The public cost of buyouts, bailouts, terminations and major problem contracts is £27,902m, when combined with the additional cost of private finance, interest rate swaps and higher PFI transaction costs. This sum could have built 1,520 new secondary schools for 1,975,000 pupils, 64% of 11-17 year old pupils in England (1,300 pupil schools, National School Delivery Cost Benchmarking, 2015 and Department of Education and National Statistics, National Tables, 2016). UK buyout/terminated ratio higher than developed countries The combined UK total of buyout and terminated contracts is 6.8%. In other words, the UK’s ratio, an industrialised country, is higher than the 5.4% average of World Bank projects in developing countries for cancelled (terminated) contracts as a percentage of the cost of investment. Furthermore, the UK combined buyout, termination and major problem contract ratio, excluding projects being bailed out, rises to 17.7% as a percentage of investment. The causes of buyouts, terminations and major problem contracts PFI/PPP projects are a product of neoliberalism, in particular the Design, Build, Finance and Operate (DBFO) model, which combines state and capital interests that increase